Is gold your best performing asset for the next five years? Is it high growth technology stocks? Energy stocks? Or maybe biotech shares?
How about French collectable postage stamps or vintage racing cars?
Nope, you’re not even close. I’ll give you a hint: you’re probably sitting in it.
Yes, the best performing investment you will own for the next five years will most likely be the home you live in.
Psshaww you may say. Perhaps even balderdash! However, if you look at the crucial data that drives this long ignored sector, my conclusions are unassailable.
If fact, you can pretty much count on your home to appreciate at a 3%-4% annual rate until well into the next decade, and more if you are fortunate enough to live on the red hot West Coast.
Net out the copious tax breaks that come with home ownership, and your take-home will be even higher than that.
For a start, the Federal Reserve’s go-slow policy on interest-rate rises is hugely pro-housing.
The conventional 30-year-fixed home mortgage can now be had for a bargain 3.5%. And many finance their properties with the 5/1 ARMs that I have been recommending, which are currently going for only 2.75%.
Worried about what happens in five years when the interest rate is reset? Just refinance during the next recession, which will almost certainly happen before then, and you’ll probably get a lower rate than you can get now.
That is, assuming you still have a job.
Any hopes that rates will rise sooner were sorely dashed by the April nonfarm payroll report of 160,000 announced on Friday.
The good news for those homeowners who rely on the floating rates of an adjustable rate mortgage is that this is not a low-interest-rate decade, but a low-interest-rate century.
Another positive is weekly jobless claims of 246,000 at 40-year lows, and a decade-low unemployment rate of 5.0%, meaning that a lot more people have the income with which to purchase homes, far more than only a couple of years ago.
And how about those energy prices? Even after this year’s prolific rally, gasoline prices are still 50% lower than they were two years ago. My eyes almost popped out of my head when I saw gas for sale in South Carolina at $1.39 a gallon two weeks ago.
Cheap fuel means that consumers have more money in their pockets with which to qualify for loans, buy houses, and meet their mortgage payments.
Not only will this be a low-interest-rate century, it will be a low-energy-cost century as well. If solar energy costs continue their dramatic rate of improvement, around 50% every four years, it will nearly be free by 2030.
Not only will free energy provide a big underpinning under home values. It will also increase the value of suburban homes where commuting is a major factor.
It gets better.
You know that millennial of yours who’s been living in your basement since he graduated from college?
Go downstairs and take a look. Chances are he probably moved out when you weren’t looking, turning his prodigious gaming skills into a high-paying coding job.
What’s more, he’s now dating a girl. You know, the one with the nose ring, the streak of purple hair, and tattoos up and down both arms?
That leads to family formation. And you know what? The most important trend affecting the economy that no one knows about is that THE UNITED STATES IS ABOUT TO ENJOY ANOTHER BABY BOOM!
That’s why new household formations are likely to jump from the current 1.2 to 1.5 million a year in the coming decade.
However, only 1 million homes a year are being build, thanks to the halving of construction capacity in the aftermath of the Great Recession. Subtract from that 250,000 houses a year that get demolished.
Does anyone hear the words “short squeeze”?
That means 85 million millennials will be chasing the homes of only 65 million Gen Xers. Here in the San Francisco Bay area they are showing up at weekend open houses and paying cash for beautiful $3 million homes with great views, writing the check right on the spot.
Americans aren’t the only ones buying homes. Some 8% of all the real estate sold in the US in 2015 was to foreign investors, largely Chinese and Hispanics, according to the National Association of Realtors. That is an all-time high. They view US real estate as a great asset protection strategy.
It is not entirely a bed of roses for housing. A new president Hillary is likely to cut the deductibility of interest on mortgages of $1 million down to only $500,000. All other tax increases will be aimed at the 1%.
Are you convinced now? Are you ready to jump into the real estate boom and participate more than just through your residence?
Fortunately, there are a number of ways you can achieve this.
Residential Real Estate Investment Trusts (REITs) offer the opportunities of both a high yield and capital appreciation.
Better yet is that all of these trade at deep discounts to book values because of fears about future interest rate rises.
You can also go into traditional new homebuilders, such as KB Homes (NYSE:KBH), Pulte Homes (NYSE:PHM), and DH Horton (NYSE:DHI). Another option is to take a basket approach by picking up the iShares US Home Construction ETF (NYSEARCA:ITB).
See you at the next open house!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.